THE WAY TO
A guide to Black Economic Empowerment
THE WAY TO
A guide to Black Economic Empowerment
This edition of The Way to BEE updates previous
editions and as before, highlights some of the issues
that businesses face implementing BEE. It offers
guidance regarding the interpretation of the Codes
of Good Practice on Broad-Based Black Economic
Empowerment gazetted by the Department of
Trade and Industry (the DTI) on
9 February 2007.
Cliffe Dekker Hofmeyr’s online document
repository located at
contains an updated version of this publication and
a number of important recource documents
pertinent to BEE.
Please do not hesitate to contact a member of
our BEE team should you have any queries relating
to this publication or BEE in general.
The content of this publication does not constitute
legal advice. Interested parties are urged to contact
Cliffe Dekker Hofmeyr for specific advice.
Whilst every effort has been made to ensure that the information published
in this document is accurate, Cliffe Dekker Hofmeyr takes no responsibility
for any loss or damage suffered by any person as a result of the reliance
on the information contained herein.
1 Introduction 3
2 Implementation of BEE 4
3 The ownership element of BEE 9
4 The management control element of BEE 18
5 The employment equity element of BEE 21
6 The skills development element of BEE 23
7 The preferential procurement element of BEE 26
8 The enterprise development element of BEE 32
9 The socio-economic development element of BEE 35
10 Verification 37
11 Glossary 39 CONTENTS
Since the publication of the final Codes of Good Practice (the Codes)
under the Broad-Based Black Economic Empowerment Act of 2003
(the BEE Act), the DTI has released an Interpretative Guide to the
Codes, additional guidance notes for complex structures and
transactions and fronting, and equity equivalent programmes, a
manual for the verification of and reporting on BEE, and regulations
regarding the validity of BEE verification certificates. In addition,
the DTI has gazetted a host of sector codes some of which were
gazetted under section 9(1) of the BEE Act and accordingly have
the same legal status as the Codes.
Despite the fact that certain anomalies regarding BEE regulatory
intent remain, there is now far greater clarity than there has ever
been previously. Understanding and implementing BEE substantively
is not only a matter of good corporate citizenship but is also a
There is no single recipe for the successful implementation of a
sustainable BEE strategy. This updated booklet serves to highlight
those aspects of the Codes that must be addressed by any business
that wishes to ensure long term sustainability as a participant in the
South African (SA) economy.
This publication is not an instruction manual and may not be used
or be interpreted as definitive advice on any matter relating to a
particular business's BEE implementation. Users of this publication
are urged to take professional advice regarding BEE and are welcome
to consult us for advice pertinent to their particular business.
As Minister Mandisi Mphalwa stated in March 2005: "Black economic
empowerment is a process. Nobody is expecting every enterprise in
South Africa to be BEE compliant immediately, but government
does expect every enterprise to immediately commence
implementation of BEE with a view to becoming compliant over
the next 10 years."
3 l Cliffe Dekker Hofmeyr THE WAY TO BEE
2 IMPLEMENTATION OF BEE also to those businesses interacting with the private sector suppliers
and service providers to the public sector and those businesses
2.1 Who must comply with BEE? operating within sectors for which sector codes or charters have
been gazetted under sections 9(1) and 12 of the BEE Act.
Section 10 of the BEE Act compels organs of state and public entities
"to apply the Codes, wherever reasonably possible" in: 2.2 Who falls outside of the ambit of BEE regulation?
determining qualification criteria for the issuing of licences,
concessions or other authorisations in terms of any law; The only regulated exemption is that for exempted micro enterprises
(EMEs), provided that they give evidence of their qualification as
developing and implementing a preferential procurement such. Customers of and development contributors to EMEs are
policy; governed by the Codes regarding the manner in which their
determining qualification criteria for the sale of state-owned contributions towards EMEs are recognised for purposes of
enterprises; and the Codes.
developing criteria for entering into partnerships with the The Codes make it clear that all businesses are subject to measurement
private sector. of their BEE compliance, except those that are exempt. The fact
that the need to implement BEE depends upon businesses having
While this provision is a mandatory obligation of the public sector
interaction with the public sector or supplier/service provider
(specifically a national or provincial department, municipality,
relationships with other private sector businesses governed by BEE
parliament, a constitutional institution listed under schedule 1 of
or because those businesses operate within sectors for which sector
the Public Finance Management Act, 1999 (PFMA) or, public entities
codes or charters have been gazetted under sections 9(1) and 12 of
listed in schedule 2 or schedule 3 of the PFMA), it has indirect
the BEE Act implies that a business having no such public sector
application to private sector businesses that:
interaction or private sector relationship or which does not operate
have or are required to have a regulatory relationship with within sectors for which sector codes or charters have been gazetted
the public sector because they conduct one or other form of under sections 9(1) and 12 of the BEE Act may be, de facto, exempt
licensed business activity; or from implementing BEE. An example of such exempt businesses
provide goods or services to the public sector; or would be the retail sector, to the extent that their supplies are made
solely to the "man in the street" and manufacturers targeting the
provide goods or services to other businesses that have a export market.
regulatory relationship with the public sector.
Business Day (1 February 2007) quoted DTI Deputy Director
Such private sector businesses will find themselves subject to General, Lionel October as saying at the time that the Codes were
commercial pressure to become and remain BEE compliant and about to be gazetted that economic sectors such as retail and export
their compliance will be measured according to the principles and manufacturing, which represented 20%-30% of the economy, were
methodology of the Codes, read with the sector codes applicable to impervious to BEE. October stated, "People are saying that it is
any business operating in a sector for which a sector code has been unfair that they have to do empowerment - and there is a cost - and
gazetted under section 9 (1) of the BEE Act, such as the Construction at the same time have to compete with companies, even if indirectly,
Sector Code, the Forestry Sector Code and the Tourism Sector Code. which are not doing anything about empowerment." Business Day
Sector charters have also been gazetted under section 12 of the BEE reported that October had indicated that the DTI would have to
Act for certain sectors, such as the Financial Services Sector, the devise "creative ways to apply pressure without tampering with the
Property Sector, the Agri-BEE Sector and the Marketing Advertising right to trade." One option, the newspaper reported, would be to
and Communications Sector. Any business which operates in these give DTI Minister Mandisi Mphalwa the power to set up charter
sectors will be required to comply (at least as between the private councils in sectors which had not initiated their own process.
sector operators within the relevant sector) with the provisions of
their applicable sector charter. Cliffe Dekker Hofmeyr's view is that the public relations opprobrium
of expressly adopting the view that one's business is, de facto,
Consequently, the pressure to become and remain BEE complaint exempt from implementing BEE is unlikely to be considered
applies not only to businesses interacting with the public sector, but desirable to most businesses.
Cliffe Dekker Hofmeyr THE WAY TO BEE l 4
2.3 What are QSEs, EMEs, start-up enterprises and The adjusted scorecards applicable to these specialised enterprises
specialised enterprises? exclude the ownership element.
QSEs 2.4 How is BEE compliance achieved?
According to the Codes, any enterprise with an annual total revenue
In terms of the Codes, a business achieves BEE compliance by
of between R5 million and R35 million qualifies as a qualifying
reference to its overall score achieved on the scorecard applicable
small enterprise (QSE) provided that the qualification does not result
to it, as measured by an accredited verification agency applying the
from a circumvention of the BEE Act or the Codes.
verification manual, in accordance with the BEE Codes, read with
EMEs the sector code applicable to any business operating in a sector
EMEs are those enterprises whose turnover is equal to or less than for which a sector code has been gazetted under section 9(1) of
the BEE Act.
Five such scorecards exist:
Start-up enterprises are also measurable as EMEs for the first year 2.4.1 Generic scorecard applicable to all entities (save for those
following their formation or incorporation. This provision applies that are either exempted; or in respect of which an automatic
regardless of the expected total revenue of the start-up enterprise. compliance level is recognised; or in respect of which separate
To qualify as a start-up enterprise, independent confirmation of the scorecards apply under the Codes) which are measured on
status of the enterprise must be provided. all seven BEE elements under this scorecard.
The exception to this provision is when a start-up enterprise is
2.4.2 Adjusted generic scorecard for specialised enterprises which
tendering for a contract or seeking any other business in terms of
are measured on six of the seven BEE elements under this
section 10 of the BEE Act (refer to paragraph 2.1) with a value
scorecard (ownership is excluded).
higher than R5 million. If such contract or other business has a value
of up to R35 million, the start up enterprise must submit a QSE 2.4.3 QSE scorecard applicable to QSEs which are measured on
scorecard, and if the value is in excess of R35 million the start up any four of the seven BEE elements under this scorecard.
enterprise must submit a generic scorecard. Such scorecards must
be prepared by using annualised data. 2.4.4 Adjusted QSE scorecard for specialised enterprises which
are also QSEs and which are measured on any four of the six
Note that a start-up enterprise cannot simply be a newly incorporated BEE elements under this scorecard (ownership is excluded).
continuation of a previous enterprise and any attempt to evade BEE
compliance obligations through opportunistic liquidation and 2.4.5 The sector code scorecards in respect of the sectors for which
re-incorporation would be regarded as an attempt to circumvent a sector code has been gazetted under section 9(1) of the BEE
the Codes. Act ie the Construction Sector Code, the Forestry Sector
Code and the Tourism Sector Code. The Mining Charter and
Specialised enterprises Scorecard gazetted by the Minister of Minerals and Energy
Specialised enterprises are those which are incapable of being defined pursuant to the Mineral and Petroleum Resources Development
as being owned or black owned. Act of 2002, is another scorecard that enjoys the force of law
despite not having been gazetted by the DTI under
Specialised enterprises include: section 9(1) of the BEE Act.
companies limited by guarantee;
The transitional scorecard was previously applicable to all entities
higher education institutions; which chose not to be measured under the generic scorecard for
non-profit organisations; the first year after the commencement of Statement 000 Code 000
(ie until 8 February 2008). The latter date was extended until
public entities and other enterprises wholly owned by an organ
31 August 2008. Under this scorecard, the ownership and
management BEE elements are multiplied by factor of 1.92 to
public benefit schemes; and achieve a transitional score for that entity. The transitional period
section 21 companies. has now expired and the transitional scorecard is no longer applicable.
5 l Cliffe Dekker Hofmeyr THE WAY TO BEE
The first four of such scorecards (excluding the transitional scorecard) Entities subject to the generic scorecard and the adjusted generic
are represented as follows: scorecard for specialised enterprises will be scored out of a possible
total of 100 points.
Generic scorecard (see paragraph 2.4.1)
Element Weighting The approach is slightly more complicated for QSEs. The total
Ownership 20 points possible score for QSEs is also 100 points. In order to attain this
Management control 10 points score, the QSE must select and be measured in respect of any
Employment equity 15 points four of the elements listed in their applicable scorecard. Where
no selection is made, it is assumed that its four best element scores
Skills development 15 points
will be used for the purposes of measurement.
Preferential procurement 20 points
Enterprise development 15 points 2.5 The overall performance in terms of these scorecards
Socio-economic development 5 points is then evaluated in accordance with the following
scoring matrix, which indicates the BEE compliance
Adjusted generic scorecard for specialised level of entities:
enterprises (see paragraph 2.4.2)
Element Weighting BEE status Qualification Compliance Level
Management control 15 points
Level 1 Contributor ≥ 100 points 135%
Employment equity 15 points
Level 2 Contributor ≥ 85 but <100 points 125%
Skills development 20 points Level 3 Contributor ≥ 75 but <85 points 110%
Procurement 20 points Level 4 Contributor ≥ 65 but <75 points 100%
Enterprise development 15 points Level 5 Contributor ≥ 55 but <65 points 80%
Socio-economic development 15 points Level 6 Contributor ≥ 45 but <55 points 60%
Level 7 Contributor ≥ 40 but <45 points 50%
The QSE scorecard (see paragraph 2.4.3)
Level 8 Contributor ≥ 30 but <40 points 10%
Element Weighting Non-Compliant Contributor <30 points 0%
Ownership 25 points
Management control 25 points It is important to note that EMEs are automatically recognised as
Employment equity 25 points Level 4 contributors to BEE, regardless of actual compliance and
provided only that proof of such status is provided in the form of
Skills development 25 points
an auditor's certificate (in the case of a company), an accounting
Preferential procurement 25 points
officer certificate (in the case of a close corporation) or, a certificate
Enterprise development 25 points by a verification agency. In addition, those EMEs which are also
Socio-economic development 25 points in excess of 50% owned by black people or 50% owned by black
women are automatically elevated to Level 3.
Adjusted QSE scorecard for specialised
enterprises (see paragraph 2.4.4) One of the most significant challenges for sole proprietorships and
Element Weighting partnerships that do not fall into the category of EMEs but do qualify
Management control 25 points as QSEs is that, with the absence of employees, the employment
equity and skills development elements cannot be included in the
Employment equity 25 points
QSE scorecard or the generic scorecard. This implies that they will
Skills development 25 points
have only five elements from which to achieve compliance. This
Procurement 25 points problem may be overcome using the QSE scorecard (provided the
Enterprise development 25 points turnover threshold applies), since only four of the elements are
Socio-economic development 25 points measured, provided that the owner of that sole proprietorship is black.
Cliffe Dekker Hofmeyr THE WAY TO BEE l 6
2.6 How is BEE compliance evidenced? 2.8 What is the status of sector transformation charters?
In terms of the Codes, the only reliable evidence of the compliance There was some uncertainty, prior to the promulgation of the
of any business is a verification certificate issued annually by an finalised Codes, as to the relationship between the Codes and
accredited verification agency. For further information on verification so-called sector transformation charters, particularly the legal status
please refer to chapter 11. enjoyed by charters in relation to the Codes, and ultimately which
set of benchmarks and targets members of a particular sector were
2.7 Who are the intended beneficiaries of BEE? required to follow. This uncertainty has been laid to rest in the
finalised Codes which sets out clearly the inter-relationship between
There is a touch of irony in this question, but it remains one of the these various statements of BEE.
most often queried aspects of BEE.
The BEE Act and the Codes recognise sector transformation charters
A black person, the Codes tell us, is an African, Coloured or Indian as evidence of the commitment by the participants in sectors that
natural person who: adopted them to implement BEE. Sector transformation charters
is a citizen of the Republic of South Africa (the RSA) by birth are therefore contextual formulations of BEE. Implicit in the
or by descent; or recognition given to sector transformation charters in the Codes is
an understanding that a formalistic application of BEE can, in certain
is a citizen of the RSA by naturalisation which was completed circumstances, lead to adverse results and detract from the goals of
prior to the coming into effect of the Constitution of the positive social transformation that underpins our BEE legislation.
Republic of South Africa Act of 1993 (the Constitution); or Sector transformation charters are gazetted by the Minister of Trade
became a citizen of the RSA by naturalisation after the coming and Industry under section 12 of the BEE Act.
into effect of the Constitution, "... but who, but for the Apartheid
policy that had been in place prior to that date, would have Examples of sector transformation charters that have been gazetted
been entitled to acquire citizenship by naturalisation prior thus far under section 12 of the BEE Act are:
to that date."
the Financial Services Sector Charter;
This means that all categories of natural persons previously subject the Property Sector Charter;
to some form of discrimination, but who are not black people as
the Agri-BEE Sector Charter; and
defined, do not qualify as beneficiaries of BEE.
the Marketing, Advertising and Communications Charter.
While this definition has added clarity to the context of BEE, there
remain niggling questions as to the status of so-called "Asians" and These charters do not have any legal or regulatory weight and only
other South Africans who were not considered "White" under have application to participants in those sectors as between them.
apartheid legislation, but who were also not African, Coloured or
Indian. A case in point is South Africa's Chinese community, many Notwithstanding the existence of a sector transformation charter in
of whom are third and fourth generation South Africans and who a particular industry (whether or not gazetted under section 12 of
were subject to unfair discrimination on the basis of race under the BEE Act), the Codes are the legally relevant benchmark for
apartheid legislation. purposes of measuring BEE compliance. Where a sector
transformation charter holds force (even if not recognised legally)
On 18 June 2008, the then Transvaal Provincial Division of the High
is in industry participants' interactions with one another. In such
Court granted a declaratory order in the matter of Chinese Association
instances, industry members will look to the relevant sector
of South Africa and Others vs the Ministers of Labour, Trade and
transformation charter for measurement of compliance with BEE
Industry, and Justice and Constitutional Development, declaring
targets even though legally, reference will be had to the Codes.
inter alia that, "the South African Chinese people fall within the
ambit of the definition of "black people" in section 1 of the BEE Act,
2003." Apart from the merits of the matter, it remains to be seen
whether such judicial "law making" passes constitutional muster.
7 l Cliffe Dekker Hofmeyr THE WAY TO BEE
2.9 What is the status of sector codes? It is also important to note that the Mining Charter and Scorecard
developed by the Minister of Minerals and Energy pursuant to the
A sector code gazetted by the Minister of Trade and Industry under Mineral and Petroleum Resources Development Act of 2002, enjoys
section 9(1) of the BEE Act has equal legal status to that of the the status of law within the context of that legislation. On 29 April
Codes, and is therefore binding on organs of state and public entities 2009, the Minister of Minerals and Energy gazetted Codes of Good
as well as the private sector. Practice for the Minerals Industry (DME Codes). While the DME
Codes have the hallmarks of a hurried attempt to achieve greater
Examples of sector codes that have been gazetted under section 9(1)
clarity regarding the principles and methodology applied by the
of the BEE Act are:
Department of Minerals and Energy to empowerment within the
the Construction Sector Code; mining sector and, alignment between the application of
empowerment in the mining sector on the one hand and the BEE
the Forestry Sector Code; and
Act and Codes on the other, the DME Codes contain a number of
the Tourism Sector Code. anomalies and ambiguities. The DME Codes do not deal with
important BEE issues that have vexed the mining sector since the
These sector codes, although legally binding, will inevitably have
adoption of the Mining Charter such as inter alia, the "continuing
to be read with the Codes for purposes of interpretation of concepts
consequences" or "once empowered always empowered" principle
and the application of various principles that are dealt with extensively
and the recognition of juristic persons as Historically Disadvantaged
in the Codes but not in these sector codes. The pre-requisites for
South Africans (in contradistinction to the BEE Act and Codes,
the gazetting of sector codes under section 9 of the BEE Act are
significantly more onerous than those for the gazetting of sector which uses the term "Black Persons" and only recognises natural
transformation charters, and include, amongst others, the following persons for the purposes of their definitions). The anomalies within
requirements: the DME Codes and, the material contradictions between the DME
Codes and the Codes will continue to create challenges regarding
the proposed sector code must address all the elements in the
transaction structuring in the mining industry, and regrettably, the
generic scorecard contained in the Codes, use the same
longstanding regulatory uncertainty regarding BEE in the mining
definitions as those in the Codes and the same calculation
methodologies as in the Codes; industry persists.
the proposed sector code may only deviate from the targets
and weighting used in the Codes if such deviations are 2.10 What is the status of the enterprises definitions?
justifiable based on sound economic principles; and
A hallmark of all the transformation charters currently in existence
the representative of the sector which is seeking to gazette a
and a central theme of all government initiatives around BEE prior
sector code must make application to the Minister for gazetting
to the Codes, were the enterprise definitions. These were essentially
of the proposed sector code and the Minister may refuse to
"quick and dirty" measurement mechanisms that allowed BEE status
do so if it does not meet the aforementioned criteria.
to be attributed to a business based solely on its overall black
ownership. These enterprise definitions included black owned
In terms of process, a sector code must first be gazetted under
companies, black empowered companies, black influenced
section 9(5) of the BEE Act for public comment, where after
companies, black women owned companies and HDSA companies
interested persons will be given a minimum of 60 (sixty) days in
which to comment on the draft sector code. Once the process in
These enterprise definitions have not found their way into the
section 9(5) is complete, with comments from interested parties
final Codes and may, for all intents and purposes, be considered
being taken into account and integrated into the draft sector code,
no longer applicable.
the final sector code is gazetted. The effect of gazetting is to confer
the same status as the BEE Codes on the sector code, which becomes
But two enterprise definitions remain that are the functional equivalent
binding on all industry participants as well as the Government in
of the previous definition of black owned companies, namely:
measuring BEE compliance in that industry.
Cliffe Dekker Hofmeyr THE WAY TO BEE l 8
BEE controlled company - a juristic person in which black commercial grounds. The fact that a subsidiary or division falls into
persons hold more that 50% of the total exercisable voting a different sector to its holding company is always considered a
rights in that juristic person, measured using the flow through sound commercial ground.
The methodology for consolidating scorecards differs slightly in
BEE owned company - a juristic person in which black persons that ownership and board membership is limited to the holding
hold more that 50% of the total economic interest in that company. Ownership points in a holding company can be achieved
juristic person, measured using the flow through principle. through the selling of shares at subsidiary level. All other elements
are measured on the basis of a straight consolidation of all compliance
An exception to this general rule is that the procurement scorecard statistics across the group or divisional structure, rather than an
includes 5 points recognising procurement from entities based solely apportionment of compliance-based contributing entity size.
on their levels of black ownership and black women ownership, and
the enterprise development scorecard recognises enterprise Similarly, special provision has been made for so-called "related
development contributions for beneficiary enterprises qualifying to EMEs" and "related QSEs".
receive such benefit solely on the basis of their level of black
ownership and black women ownership. Related EMEs are EMEs that are controlled by a measured EME,
whether directly or indirectly and over whom the measured EME
has direct or indirect control. If the combined turnover of related
2.11 What is the relevance of the transitional period? EMEs is over R5 million, then they must obtain either a consolidated
scorecard as if they were a group structure or individual scorecards
The transitional period expired on 31 August 2008 and is no longer for each related enterprise. If the combined turnover is less than
applicable or relevant. R5 million then each entity remains exempt from obtaining a scorecard.
Related QSEs are QSEs that are controlled by a measured QSE,
2.12 Compliance reports: A look into group and divisional whether directly or indirectly and over whom the measured QSE
structures, related EMEs and unincorporated has direct or indirect control. If the combined turnover of related
Joint Ventures QSEs is over R35 million, then they must obtain either a consolidated
scorecard as if they were a group structure or individual scorecards
The DTI has released certain guidance notes on the subject of groups for each related enterprise.
and divisional structures. These structures may report either on a
consolidated basis or by entity. If a group or divisional structure Unincorporated joint ventures may obtain consolidated scorecards
elects to report on a consolidated basis, then it may only exclude as if they were group structures, provided that such consolidated
individual entities from the consolidation if justified on sound scorecards are prepared for every separate venture.
3 THE OWNERSHIP ELEMENT OF BEE
3.1 How is ownership measured under the Codes?
Ownership is weighted as contributing 20 points under the generic The ownership element of BEE is measured using an ownership
scorecard and 25 points under the QSE scorecard. scorecard. This scorecard differs depending on whether the business
being measured is QSE or not.
Ownership contributions to BEE are regulated in terms of Code
9 l Cliffe Dekker Hofmeyr THE WAY TO BEE
The following ownership scorecard applies under the generic scorecard applicable to non-QSEs:
Ownership indicator Weighting Target
exercisable voting rights in the enterprise in the hands of black people 3 25%+1 vote
exercisable voting rights in the enterprise in the hands of black women 2 10%
Economic interest of black people in the enterprise 4 25%
Economic interest of black women in the enterprise 2 10%
Economic interest in the enterprise of black designated groups, 1 2.50%
Black participants in employee ownership schemes,
Black participants in broad-based ownership schemes and
Black participants in co-operatives natural people
Ownership fulfilment 1
Net asset value 7
Involvement in the ownership of the enterprise of black new entrants 2 10%
Involvement in the ownership of the enterprise of black participants 1 10%
in employee ownership schemes, broad-based ownership schemes
The following ownership scorecard applies under the QSE scorecard applicable to QSEs:
Ownership indicator Weighting Target
Exercisable voting rights in the enterprise in the hands of black people 6 25%+1 vote
Economic interest of black people in the enterprise 9 25%
Ownership fulfillment 1
Net asset value 9
Involvement in the ownership of the enterprise by black participants 1 10%
in employee ownership schemes, co-operatives or of broad-based
Involvement in the ownership of the enterprise of black women 2 10%
Cliffe Dekker Hofmeyr THE WAY TO BEE l 10
3.2 What are voting rights and how are they measured? Economic interest payable directly to black people arising from
their ownership of the measured business is expressed as the
A voting right is the right of an owner of a business to participate percentage that such economic interest bears to the total economic
in the control of that business in a manner analogous to the exercise interest payable to all the owners of the measured business. Where
by a shareholder of the shareholder's voting right. economic interest is payable through an intermediary vehicle, the
Codes provide for a so-called "flow-through principle" which
In order to be recognised, the voting right must be exercisable by mathematically attributes a level of black participation in such
the owner thereof. Where that right has been ceded, assigned or economic interest.
similarly transferred to another person, those voting rights will
generally not be recognised. It is crucial to understand that economic interest in an intermediary
vehicle is measured in precisely the same manner as is the case in
Voting rights exercisable by black people directly in the measured respect of the measured business.
business are expressed as the percentage of the total voting rights
exercisable by all persons directly in the measured business. Economic interest payable through an intermediary vehicle dilutes
at each intermediary level to the extent of non-black participation
Where the voting rights are exercisable through an intermediary
in the economic interest payable by each such intermediary vehicle.
vehicle, the Codes provide for a so-called "flow-through principle",
which mathematically attributes a level of black participation in
In the context of intermediary vehicles that are companies with a
those voting rights. It is crucial to understand that voting rights in
share capital, the principle of dilution by reason of non-black
an intermediary vehicle are measured in precisely the same manner
participation is not as severely treated by reason of the application
as is the case in respect of the measured business and the fact that
of the modified flow-through principle (see paragraph 3.11 below).
non-black voting rights are exercised by a black representative (and
vice versa) is not relevant.
3.4 What are the ownership targets under the generic
Generally, voting rights held through an intermediary vehicle dilute scorecard?
at each intermediary level to the extent of non-black participation
in the voting rights of each such intermediary vehicle. In the context Under the generic scorecard, separate targets are established for
of intermediary vehicles that are companies with share capital, participation by black women and for participation of black
dilution by reason of non-black participation is not as severely designated groups, black participants in certain types of broad-
treated by reason of the application of the modified flow-through based ownership schemes and black participants in co-operatives.
principle (see paragraph 3.11 below).
A measured business cannot attain full-marks for ownership in the
3.3 What is economic interest and how is it measured? absence of participation by black people falling within those
Economic interest is defined as a claim against an entity representing
The category "black designated groups" includes black people who
a return on ownership of the entity. Many BEE commentators often
use the term "economic interest" as if it bears the same meaning
as dividend entitlement. This is not strictly the case. unemployed people who are not attending or awaiting
acceptance to attend an educational institution;
Preferent dividends resulting from a debt financing arrangement do
not always constitute economic interest, while non-dividend payments youth;
to shareholders which are excessive, paid in bad faith or intended disabled; or
to circumvent the BEE Act and the Codes, are treated as
living in rural and underdeveloped areas.
"Black aged persons" are not included in the definition of black
Generally, dividend entitlement will constitute economic interest,
designated groups in the Codes. One would naturally assume that
and economic interest will only in exceptional circumstances not
black people over the age of 65, who lived through and survived
comprise dividend entitlement.
11 l Cliffe Dekker Hofmeyr THE WAY TO BEE
the entire period of apartheid, are among the most deserving in their operations in other countries. Three programmes have been
beneficiaries of BEE, but this is not the position under the Codes. predefined in the Codes:
Broad-based ownership schemes will be discussed separately below.
programmes supporting the SA Government's Accelerated
and Shared Growth Initiative (ASGISA), Joint Initiative for
3.5 What is measurable value?
Priority Skills Acquisition (JIPSA) and NSDS initiatives;
The first procedure in evaluating ownership is to determine what programmes promoting enterprise creation in respect of
value ownership will be measured against. co-operatives; and
programmes promoting socio-economic advancement or
Ownership is measured against the value of the SA operations of
contribute to the overall social development of South Africa.
the measured enterprise. Government ownership is not relevant to
the measurement of ownership. Equity equivalents are not limited to these three programme types
and the DTI may, upon application, approve any other viable
We therefore begin by excluding any value derived from non- programme. An equity equivalent programme must include such
domestic operations as well as SA government ownership. There details as a full description of its objectives and projected outcomes,
are no limitations on the total exclusion on this basis from measurable qualification criteria, and timelines for implementation. Equity
value. Since 100% government-owned entities are subject to the equivalent programmes are expected to contribute toward the
adjusted generic scorecard (which excludes ownership), the potential achievement of the following objectives:
100% exclusion is of no consequence to them. Similarly, SA owned
1. Enterprise creation and development;
enterprises which are entirely non-domestic are not within the ambit
of the Codes (at present) and, hence, a 100% exclusion is of no 2. Foreign direct investment;
consequence to them either. 3. Accelerated empowerment of black rural women;
4. Sustainable growth and development;
3.6 How does the evaluation of the BEE compliance of
5. Human development with focus on education and skills
multinationals differ from those of domestic entities?
The next question to be asked is whether the measured enterprise 6. Infrastructure investment with emphasis on developing the
has multinational ownership or not. country's research and development infrastructure.
If so, it is important to understand that foreign multinationals and The targets are set at either 25% of the value of the SA operations
SA multinationals are only required to evaluate their operations in of the multinational using a standard valuation methodology or 4%
South Africa for BEE purposes. of its total revenue from its SA operations every year for 10 years.
Both targets can be achieved on either an upfront once off basis or
Two options are now available to the multinational enterprise, on an annual basis towards a ten-year target.
namely equity equivalents or offshore equity.
3.8 What is offshore equity?
3.7 What is an 'equity equivalent'?
Offshore equity allows ownership by black people in an offshore
multinational parent (or its subsidiary) to count as ownership in its
An equity equivalent programme is a public or private programme
or scheme which is approved by the Minster of Trade and Industry
and designed to recognise a multinational's contribution to BEE The recognition methodology depends on the multinational having
ownership in lieu of a sale of equity to black people. An equity sold a portion of its shares in its offshore holding company (or its
equivalent programme may only be relied upon by multinationals subsidiary) to SA black people. The percentage value of those shares
that are able to show that they have a global practice (pre-existing determined in relation to the value of the SA operations of that
the promulgation of the BEE Act) of not alienating equity or assets multinational represents the economic interest held by black people
Cliffe Dekker Hofmeyr THE WAY TO BEE l 12
in the multinational for purposes of the Codes, and the percentage ownership in the measured entity are the modified flow-through
voting rights attaching to those shares represents the exercisable principle and the exclusion principle.
voting rights of black people in that multinational. A multinational
that utilises the offshore equity provisions of the Codes will have 3.11 What is the modified flow-through principle?
ownership measured in terms of the ownership scorecard.
The modified flow-through principle applies only to any BEE owned
3.9 What are qualifying transactions and associated or controlled companies in the ownership of a measured entity
enterprises? and is explained in the Codes in the following terms:
“Where, in the chain of ownership, black people have an effective
Save for as stated in respect of equity equivalents, offshore equity flow-through interest in excess of 50%, then only once in the chain
and "consolidated" groups, there are only two means by which may that effective interest be treated as 100% black shareholding”.
ownership recognition can be achieved:
The modified flow-through principle applies to both economic
black-owned equity in the measured enterprise; or
interest and voting rights.
black-owned equity in an associated enterprise.
This implies that companies may 'gross-up' one black majority-
Associated enterprises are those with which qualifying transactions
owned company in an ownership structure to a 100% black owned
have been concluded.
in every chain of ownership leading into the measured enterprise.
While the term "chain" is not defined, logic dictates that a chain is
Qualifying transactions are a means for an enterprise to effectively
the entire structure that exists above each of the direct shareholders
treat black ownership in an associated enterprise as if it were
in the measured enterprise.
ownership in the measured enterprise and results from the sale by
the measured enterprise of assets or businesses, or the sale of shares
The modified flow-through principle applies only to the measurement
in subsidiaries (to that associated enterprise) which must result in:
of the voting rights and economic interest held by black people
the creation of sustainable businesses for black people; and generally (that is, only paragraphs 2.1.1 and 2.21 of the ownership
the transfer of specialised skills or productive capacity to scorecard). It does not apply to the measurement of voting rights
black people. and economic interest under any of the other indicators of the
ownership scorecard. Importantly, it does not apply in the calculation
The qualifying transaction must involve a separate enterprise of realisation points under Annexe 100 (C) to Code 100.
(the associated enterprise) which has:
no unreasonable limitations as to its clients or customers; 3.12 What is the exclusion principle?
clients, customers or suppliers other than the seller; and
3.12.1 Ownership held by organs of state or public entities
no unreasonable limitations and no operational outsourcing
Ownership in a measured enterprise held directly by organs of state
arrangements negotiated with the seller that were not
or public entities must be excluded unless the Minster has designated
concluded at arms-length or on a fair and reasonable basis.
(by gazette) such entities as BEE Facilitators, in which case the
The percentage represented by the value of the qualifying transaction Codes provide for specific levels of black ownership recognition
divided by the value of the selling entity, multiplied by the percentage attributable to black people generally, black women and black
black ownership in the associated enterprise, is considered to be designated groups.
black ownership in the measured entity.
3.12.2 Ownership held directly by mandated investments
3.10 What are the measurement approaches? Up to 40% of the ownership in a measured enterprise may be
excluded if it emanates from so-called "mandated investments".
The next step in the process is to elect a measurement principle. Mandated investments are described as any investments made by
Two fundamental principles applicable to the measurement of black or through any third party regulated by legislation on behalf of the
13 l Cliffe Dekker Hofmeyr THE WAY TO BEE
actual owner of the funds. These include: a broad based ownership scheme which forms part of a
section 21 company which holds rights of ownership in a
investments of collective investment schemes;
measured entity may contribute a maximum of 40% of the
investments of pension funds; total points on the ownership scorecard if it meets the
investments of medical schemes; qualification criteria for broad-based ownership schemes under
investments of long-term insurers (but specifically limited Annexe 100 (B), or 100% if they meet the additional
to policyholder funds); and qualification criteria under Annexe 100 (B).
investments of banks (but specifically limited to Alternatively, if a measured enterprise wishes to exclude such
depositors funds). ownership, up to 40% of the ownership by section 21 companies
or companies limited by guarantee may be excluded.
A measured enterprise electing not to exclude mandated investments
may either treat all of the ownership by such mandated investments 3.13 Black managed private equity funds
as non-black, or may obtain a competent person's report estimating
the extent of black ownership measurable in the measured entity as A company may treat any of its ownership arising from a private
a result of ownership by the mandated investment. It is important equity fund as if that ownership were held by black people, where
to note that a measured entity cannot elect to exclude some mandated the private equity fund meets the following criteria:
investments and include others. It either includes or excludes all
more than 50% of any voting rights associated with the shares
through which the private equity fund holds rights of ownership
In effect, in the case of mandated investments, if a measured entity are held by black people;
with 15% black ownership elected to exclude the full 40% of
more than 50% of profits made by the private equity fund
ownership held by mandated investments, the measured entity would
after realising any investment made by it must, by written
in effect be considered 25% black owned.
agreement, accrue to black people;
3.12.3 Ownership held directly by Section 21 companies or the private equity fund manager must be a BEE owned
companies limited by guarantee company; and
Equity interests held in a measured enterprise by section 21 companies more than 50% of the value of funds invested by any private
or companies limited by guarantee may also be included or excluded equity fund must at all times be invested in black owned
at the election of the measured enterprise. enterprises that were at least 25% black owned before the
investment of the private equity fund.
Attention is drawn to the fact that section 21 companies or companies
limited by guarantee are measured according to the adjusted generic
The above qualification criteria are immensely stringent. The DTI
scorecard or adjusted QSE scorecard. Accordingly, if a measured
has sought to soften the requirements in the Interpretive Guide by,
enterprise wishes to include ownership by section 21 companies or
inter alia, replacing references to the "private equity fund" with
companies limited by guarantee in its scoring under the ownership
references to the "private equity fund manager". It is crucial to note
indicator of the generic scorecard, then:
that the Interpretive Guide does not have the force of law and the
the measured enterprise may either treat all of that ownership provisions of the Codes supersede the Interpretive Guide. Caution
as non-black or, obtain a competent persons report estimating must therefore be exercised when applying provisions of the
the extent of black ownership measurable in the measured Interpretive Guide which are contrary to those of the Codes.
entity as a result of ownership by those section 21 companies
or companies limited by guarantee; 3.14 Continued recognition of ownership after the loss or
in the case of ownership by section 21 companies or companies sale of shares by black participants
limited by guarantee that house broad based ownership schemes,
the specific rules pertaining to the latter in Code 100 will have This is a complex provision which in essence permits continued
to be observed; and (but limited) recognition by a measured entity of the ownership by
Cliffe Dekker Hofmeyr THE WAY TO BEE l 14
a black participant that has sold or lost its shares in the measured which provides a time limit to continued recognition in
enterprise. such instances.
The continued recognition is subject to the following criteria: The formula for the calculation of the continued recognition points
the black participant must have held its shares for a period of is provided for in Annexe 100(C) of Code 100.
at least three years;
3.15 What is net value and how is it measured?
value must have been created in the hands of black people;
The net value measurement in the Codes is intended to measure the
transformation must have taken place within the measured level of indebtedness of black people in the ownership of a measured
enterprise. business. Such indebtedness is only relevant to the extent that it
was incurred in order to facilitate the acquisition of such ownership.
The black ownership arising from continued recognition of black
The net value points' calculation is based on the lower result of the
participation in the measured enterprise is limited to no more than
application of two formulae set out in Annexe 100 (C) of Code 100.
40% of the score on the ownership scorecard and the ownership
points attributable to the measured entity must be calculated by
The first formula (Formula A under Annexe 100(C)) may be
multiplying the following elements:
summarised as being based upon the current net value of interests
the value created for black people as a percentage of the value held by black people (taking into account growth in value of the
of the measured entity at the date of the loss of shares as a underlying measured entity and the current balance of any acquisition
percentage of measured entity's value; finance owing by such black people) as a percentage of the value
of the measured entity, multiplied by a graduation factor and
the BEE status of the measured entity based on the balanced
multiplied by the seven points for net value.
scorecard (on the generic scorecard for all elements other
than ownership) at the date of measurement; and
It is intended that within 10 years of the commencement of the
the ownership points that were attributable to the measured transaction, the targeted level of compliance will be 25%, but that
enterprise on the date of sale or loss. target has been graduated over the 10 year period with a target of
2.5% at the end of the first year, 5% at the end of the second year,
No time limit for the continued recognition of the lost or sold black
and a further 5% for every two years thereafter until the expiry of
equity is provided for in the Codes.
a period of 10 years.
An appreciation in the value of the measured entity over time (after
The second formula (Formula B under Annexe 100 (C)) may be
the loss or sale) will impact the measured entity's points for continued
summarised as being based upon the percentage economic interest
recognition, because the relevant time for the valuation of the black
held by black people in the measured entity relative to the targeted
equity interests which has been lost or sold is the date of such loss
or sale, while the relevant time for the valuation of the measured percentage for black ownership (25%) under the ownership indicator,
entity is the date at which valuation (for purposes of the continued multiplied by the 7 points for net value.
recognition points) occurs.
For BEE transactions in which black people have acquired 25% of
The only qualification to the latter observations is that in the case the measured enterprise, Formula A will invariably yield the lesser
of a loss of shares by the black participant, the following additional result and, therefore, should be the one to which particular attention
rules apply: must be paid in order for a measured enterprise to score maximally
for net value.
a written tripartite agreement between the measured enterprise,
the black participant and a lender must record the loan or
Bear in mind that the flow through principle must be applied in the
security arrangement, unless the measured enterprise is the
application of Formula B and not the modified flow-through principle.
the period over which the points were allocated or recognised Transactions undertaken prior to the commencement of the Codes
will not exceed the period over which the shares were held - are measured against the 10-year target with effect from the
15 l Cliffe Dekker Hofmeyr THE WAY TO BEE
commencement of the Codes, thereby providing a significant benefit 3.18 How is black ownership through a broad-based
for early performers. ownership and employee ownership scheme measured?
Indebtedness of intermediary vehicles may be deemed to be The minimum requirements for a black broad-based ownership
indebtedness in the hands of the ultimate black owners in certain scheme are outlined below:
the management fees of the scheme must not exceed 15%
of total revenues;
3.16 How is the ownership fulfilment point awarded?
the constitution of the scheme must record the rules governing
Where black people holding rights of ownership in a measured any portion of economic interest received and reserved for
entity have encumbered those rights pursuant to a finance arrangement future distribution or application;
whereby the acquisition of those rights was facilitated, the ownership at least 85% of the value of benefits allocated by the scheme
fulfilment point will not be awarded until such time as the must accrue to black people;
encumbrance has been removed.
at least 50% of the fiduciaries of the scheme must be
independent persons having no employment with or direct
The ownership fulfilment point can in any event not be awarded unless
or indirect beneficial interest in the scheme;
the measured business has attained a score of 7 out of 7 for net value
(which implies that the targeted 25% of economic interest by black people at least 50% of the fiduciaries of the scheme must be black
in the measured entity must also have been achieved). people and at least 25% must be black women;
the chairperson of the scheme must be independent; and
Encumbrances on the rights of intermediary vehicles may be deemed
to be encumbrances against the ultimate black owners in certain on the winding-up or termination of the scheme, all
circumstances. accumulated economic interest must be transferred to
beneficiaries or an entity with similar objectives.
3.17 How are the bonus points awarded?
The minimum requirements for Employee Share Ownership
Schemes (ESOPs) are outlined below:
Bonus points may be awarded for the introduction of black new
entrants or black participants in broad-based ownership schemes the scheme constitution must define the beneficiaries and the
into the ownership of a business. Black new entrants are black proportion of their claim to receive distributions - a written
people who have never previously held equity interests in any record of the name of the participants or the use of a defined
other entity with a cumulative value in excess of R20 million. class of natural persons satisfies the requirement of
identification, and a written record of fixed percentages of
It is important to note that the award of the bonus points against the claim or the use of a formula for calculating claims satisfies
participation by black new entrants is effectively a "high-water the need for defining proportion of benefit;
mark" measurement. If black people qualify as new entrants upon the fiduciaries of the scheme must have no discretion as to
their entry into the equity of the measured entity, they will retain the identity of beneficiaries or the proportion of their benefit;
that status (for purposes of that measured entity) regardless of
the beneficiaries must appoint at least 50% of the fiduciaries
subsequent transactions undertaken by them.
of the scheme;
Two bonus points are awarded for the targeted percentage ownership the beneficiaries must participate in the management of the
(10%) for black new entrants; and one bonus point is awarded for scheme at a level similar to the management role of
the targeted percentage ownership (10%) by black people via shareholders in a company having shareholding;
employee ownership schemes, broad-based ownership schemes
the constitution, or other relevant statutory documents, of the
scheme must be available on request to any beneficiary in an
official language in which that person is familiar;
Cliffe Dekker Hofmeyr THE WAY TO BEE l 16
all accumulated economic interest of the scheme must be In order for ownership arising from black participation in trusts to
payable to the beneficiaries at the earlier of a date or event be recognised by a measured entity as black ownership for 100%
specified in the scheme constitution, or on the termination or of the total points on the ownership scorecard, trusts must be able
winding-up of the scheme; and to demonstrate that they have been created for a legitimate
commercial reason, which must be fully disclosed, and the terms
the scheme fiduciaries must present the financial reports of
of the trust must not seek to directly or indirectly circumvent the
the scheme to beneficiaries annually at an annual general
Codes and the Act. These additional requirements must be confirmed
meeting of the scheme.
in a certificate to this effect by a "competent person", presumably
Once the minimum requirements are achieved in either a broad- an attorney, accountant, tax consultant or estate planner.
based scheme or an ESOP, ownership by such scheme in the measured
entity can be recognised as black ownership up to a maximum We are of the view that trusts structured for estate planning or tax
cumulative level of 40% of the total points on the ownership purposes must meet the requirement of legitimate purpose, and that a
scorecard. family trust can hardly be suggested as not qualifying for full recognition.
It would also appear to be the case that broad-based schemes and
In order for ownership by a broad-based scheme or an ESOP to be ESOPs, commonly structured as trusts, may have difficulty in satisfying
recognised as black ownership for 100% of the total points on the these additional requirements. Special attention will have to be paid
ownership scorecard, such schemes must demonstrate that they have to these types of structures if it is intended to rely on them for recognition
a track record of operating as such, or, in the absence of such a of 100% of the points on the ownership scorecard.
track-record, demonstrable evidence of full operational capacity to
operate as such a scheme. Trusts which do not qualify as ESOPs or broad-based ownership
schemes will not count towards the bonus point allocation.
Operational capacity must be evidenced by suitably qualified and
experienced staff in sufficient number, experienced professional 3.20 How is government ownership measured?
advisors, operating premises and all other necessary requirements
for operating a business. Ownership by organs of state is generally considered neither black
nor non-black. As such, any level of government ownership in a
3.19 How is black ownership through a trust measured? measured business must be excluded from all calculations, unless
the Minster has designated (by gazette) such entities as BEE
Black ownership arising from black participation in trusts is Facilitators, as discussed at 3.12 above.
recognised subject to the same cumulative maximum of 40% of the
Wholly state-owned public entities are themselves subject to
ownership points applicable to ESOPs and broad-based schemes,
ownership measurement under the adjusted generic and QSE
provided that they meet the following requirements (which are less
scorecards and need only comply with the six elements of BEE,
strict than those of ESOPs and broad-based ownership schemes):
other than ownership.
the trust deed must define the beneficiaries and the proportion
of their entitlement to receive distributions - a written record 3.21 How are preference shares treated?
of the name of the beneficiaries or the use of a defined class
of natural persons satisfies the requirement of identification Preference shares in a company, which have the characteristics of
and, a written record of fixed percentages of entitlement or debt, are treated by the Codes as being an ordinary loan subject to
the use of a formula for calculating entitlement satisfies the measurement under the net value aspect of the ownership scorecard
need for defining proportion of benefit; and if the "debt" is that of black people, and payment of preferent dividends
in respect of such shares does not constitute economic interest.
the fiduciaries of the scheme must have no discretion as to the
identity of beneficiaries or the proportion of their benefit; and It is crucial to note that where a preference share or other similar
on winding-up or termination of the trust, all accumulated debt-equity instrument has a hybrid nature which includes the
economic interest must be transferred to the beneficiaries or characteristics of debt and of equity, only the portion that represents
to an entity representing the interests of the beneficiaries or debt will be treated as an ordinary loan and the balance will be
class of beneficiaries. treated as ordinary equity.
17 l Cliffe Dekker Hofmeyr THE WAY TO BEE
If a black person holds an option to acquire equity at a future date: the value of the option will be applied to the calculation of
current equity interest.
voting rights irrevocably transferred to the (black) holder of
that option for the duration of the option period and which
are exercisable by the (black) holder prior to the exercise of 3.22 What are the implications for QSEs and EMEs?
the option will be recognised as voting rights held by black
people; and Ownership is weighted as contributing 25 points under the QSE
scorecard. In addition, the secondary targets for black women and
the value of any economic interest irrevocably transferred
certain other categories of black people applicable under the generic
and paid to the (black) holder of the option for the duration
scorecard, are not applicable to QSEs, although 2 bonus points are
of the option period prior to the exercise of the option will be
awarded for black women participation.
considered to be economic interest held by black people; and
4 THE MANAGEMENT CONTROL ELEMENT OF BEE
4.1 How is management control measured under the Codes?
Management control is weighted as contributing 10 points under This scorecard differs depending on whether the business being
the generic scorecard and 25 points under the QSE scorecard. measured is QSE or not.
Management control is regulated in terms of Code 200 and is
measured using a management control scorecard.
The following management control scorecard applies to non-QSEs:
Management control indicator Weighting points Compliance target
Exercisable voting rights of black board members adjusted using the adjusted 3 50%
recognition for gender
Black executive directors adjusted using the adjusted recognition for gender 2 50%
Black senior top management adjusted using the adjusted recognition for gender 3 40%
Black other top management adjusted using the adjusted recognition for gender 2 40%
Black independent non-executive board members 1 40%
The following management control scorecard applies to QSEs:
Management control indicator Weighting points Compliance target
Black representation at top-manager level 25 50.1%
Black women representation as top-managers 2 25%
Cliffe Dekker Hofmeyr THE WAY TO BEE l 18
4.2 What constitutes a board? who are also ordinary employees of the measured entity, typically
employed as executive managers.
In the context of a company, the board is made up of those persons
elected by the shareholders to serve as board members. In the case 4.4 What is meant by top management?
of other forms of enterprise, the board would be the owner
representative body. The Codes state that this term is to be interpreted by reference to
form EEA9 of the regulations issued under the Employment
4.3 What is meant by executive board members? Equity Act (the EEA).
Executive board members are those persons serving on the board That document contains the following table:
Semantic scale Paterson Peromnes Hay
Top management F F 1++
Senior management E E 1 1
UPPER 2 2
Professionally qualified, experienced specialists and mid-management D D 4 3
UPPER 5 4
Skilled technical and academically qualified workers, junior management, C C 7 5
supervisors, foremen, superintendents UPPER 8 6
C 9 6A
LOWER 10 7
Semi-skilled and discretionary decision making B B 13 9
UPPER 14 10
B B 15 11
Unskilled and defined decision making A A 17 12
Other than the vague reference to EEA9, the Codes do provide the appointed by or on the authority of the board to undertake the
following clearer descriptions: day-to-day management of that measured entity and who:
"Senior top management" is defined as being employees of a • have individual responsibility for the overall management
measured entity who are: and for the financial management of that measured entity;
members of the occupation category of "top management" and
as determined using the EE Regulations as qualified in a • are actively involved in developing and implementing the
sector code; measured entity's overall strategy.
19 l Cliffe Dekker Hofmeyr THE WAY TO BEE
Common examples of senior top management stated in the Codes Given that top management under Code 200 and senior management
are, chief executive officers, chief operating officers and chief under Code 300 both account for 5 points of the total scorecard,
financial officers. there is little benefit in choosing either approach, save that an
enterprise that includes its senior management (as defined under
The Codes provide that other top management positions include the employment equity scorecard) for purposes of the management
chief information officer, the head of marketing, the head of sales, control scorecard, would appear to be disadvantaged by not being
the head of public relations, the head of transformation, the head of able to score for senior management again under the employment
human resources and other people holding similar positions. equity scorecard, resulting in a deficit of 5 points on the latter
4.5 What is adjusted recognition for gender?
If an enterprise does not distinguish between senior top management
The adjusted recognition for gender is measured in all categories and other top management, then top management is measurable as
under management control, except for non-executive independents a single indicator with a weighting of 5 points.
for large entities when calculating the bonus point. The basis of the
calculation is such that the full points allocation for any category 4.8 How are the bonus points awarded?
in the management scorecard is only possible if black women account
for 50% or more of black people in that measurement category. This Points are awarded against the level of black representation among
effectively ensures that all targets in the scorecard include a secondary non-executive independent directors, as defined in the King Report
target of 50% for black women. on Corporate Governance for South Africa. This bonus point is
probably only relevant to public companies listed on the JSE, or
4.6 How is board participation measured? large unlisted public or private companies. The bonus point does
not apply to the QSE management control scorecard.
Points are awarded for the voting rights held by black people on the
board and the level of black representation among executive directors. 4.9 How are the QSE management control points awarded?
Both elements are measured using the adjusted recognition for
gender. 25 points are awarded against a targeted level of 50.1% black top
management participation. The calculation for adjusted recognition
4.7 How is top management participation measured? for gender is not applied but 2 bonus points are awarded for a
targeted level of 25% black women representation in top
Points are awarded for the level of black representation among management.
senior top management, and the level of black representation among
other top management. The adjusted recognition for gender calculation The QSE management control scorecard is considerably less onerous
applies. than the management control scorecard applicable to non-QSEs.
If an enterprise does not have a category of management which is
the equivalent of top management or does not distinguish between
top management and senior management, then it may include its
senior management for purposes of the senior top management
indicator using the corresponding targets in employment equity
score card contained in Code 300, Statement 300 for senior
Cliffe Dekker Hofmeyr THE WAY TO BEE l 20
5 THE EMPLOYMENT EQUITY ELEMENT OF BEE
5.1 How is employment equity measured under the Codes? Economically Active Population targets) and 25 points under the
QSE scorecard (plus 2 bonus points). The manner in which businesses
The employment equity element of BEE is measured using an attain points for employment equity is set out in Code 300 (for non-
employment equity scorecard. This scorecard differs depending on QSEs) and Code 800, Statement 803 (for QSEs). Two sets of five-
whether the business being measured is a QSE or a non-QSE. A year period targets apply to each code. Employment equity is
business that is being measured can score a total of 15 points under strongly aligned with the provisions of the EEA.
the generic scorecard (plus 3 bonus points for achieving the
The following employment equity scorecard applies to non-QSEs:
Criteria Weighting points Compliance targets
years 0 - 5 years 6 -10
Black employees of the measured entity who are disabled 2 2% 3%
employees as a percentage of all employees adjusted
using the adjusted recognition for gender
Black employees of the measured entity who are in the 5 43% 60%
measurement category of senior management as a percentage
of all employees in that measurement category adjusted
using the adjusted recognition for gender
Black employees of the measured entity who are in the 4 63% 75%
measurement category of middle management as a percentage
of all employees in that measurement category adjusted
using the adjusted recognition for gender
Black employees of the measured entity who are in the 4 68% 80%
measurement category of junior management as a
percentage of all employees in that measurement
category adjusted using the adjusted recognition for gender
Compliance with the EAP 3
The following employment equity scorecard applies to QSEs:
Criteria Weighting points Compliance targets
years 0 - 5 years 6 -10
Black employees of the measured entity who are management as a 15 40% 60%
percentage of all management adjusted using the adjusted
recognition for gender
Black employees of the measured as a percentage of all employees 10 60% 70%
adjusted using the adjusted recognition for gender
Bonus Point for meeting or exceeding the EAP targets in
each category above
21 l Cliffe Dekker Hofmeyr THE WAY TO BEE
5.2 How are the terms used in the non-QSEs employment Stated differently, to commence scoring in either the first or second
equity scorecard defined? five-year period, a sub-minimum of 40% must be achieved on each
of the targets of the respective non-QSE and QSE employment
All of the terms, other than "disabled person", used in the non-QSE equity scorecards.
employment equity scorecard are defined by reference to certain
forms that form part of the regulations under the EEA. Please see The Interpretive Guide indicates that the actual performance
our comments on form EEA9 under paragraph 4.4 above. requirement is intended to be measured using the adjusted recognition
for gender. On the example above, the actual effect of the 40% sub-
The EEA has been in operation for some time now and most minimum is such that a non-QSE would need 17.2% black people
businesses have had to become compliant with the EEA. Most consisting of 8.6% black women to start scoring points.
businesses would also by now have submitted regular reports based
on their employment equity plans to the SA Department of Labour 5.4 What about the non-QSE bonus points?
detailing the demographics of their staff members.
The Economically Active Population (EAP) is defined as being the
This reporting is done on the basis of the occupational levels specified
"Economically Active Population as determined and published by
in form EEA9. The simplest answer to this question of definition
Statistics South Africa. The applicable EAP for the purposes of
would be to say that "black persons" and "black women" in the
any calculation under the Codes will be the most recently
various occupational levels listed in the scorecard would be those
persons reported on in the racial categories of African, Coloured
and Indian in the employment equity report of a business. That
If companies demonstrate compliance levels at those of the EAP,
assumption is based on companies that have accurately allocated
they qualify for 2 bonus points.
their staff between the racial categories and the various occupational
levels but surprisingly, not many companies have. The added concern
This provision encourages companies to target true demographic
is that the necessity to comply with the EEA depends on certain
representation and although it lacks clarity in certain respects, one
criteria, in particular the number of employees a company has and
thing is clear: both the EAP and black women representation are
the annual turnover of the business operating in specific industries
crucial issues that no company can afford to ignore.
The term "disabled people" may be interpreted by reference to 5.5 What are the implications for QSEs/EMEs?
paragraph of the "Code of Good of Practice on the Employment of
People with Disabilities" issued in terms of section 54(1)(a) of the The QSE employment equity scorecard is far less onerous than the
EEA. Section 1 of the EEA defines people with disabilities as "people employment equity scorecard applicable to non-QSEs and only
who have a long-term or recurring physical or mental impairment, differentiates between management employees and other employees.
which substantially limits their prospects of entry into, or advancement Since the provisions of the EEA relating to the occupational levels
in, employment." and the reporting in respect of racial composition of each occupational
level is not applicable to many QSEs (as designated employers as
The employment equity scorecards for both non-QSEs and QSEs, defined in EEA), the QSE employment equity scorecard will have
focus on and embed the adjusted recognition for gender calculation the effect of extending the application and ambit of EEA to QSE
referred to in paragraph 4.5. employers to which it has not previously applied.
5.3 What is the 40% sub-minimum?
In respect of each of the measurement categories in the employment
equity scorecard for large companies, a sub-minimum of 40% of
the target applies. This means that if a non-QSE fails to meet 40%
of their target for senior management (ie. 43%) for the first five-
year period (ie 17.2%), it will score 0 for that measurement category.
Cliffe Dekker Hofmeyr THE WAY TO BEE l 22
6 THE SKILLS DEVELOPMENT ELEMENT OF BEE
6.1 How is skills development measured under the Codes? A non-QSE can score a total of 15 points under the generic scorecard
and a QSE can score 25 points under the QSE scorecard. The manner
The skills development element of BEE is measured by using a in which businesses attain points for skills development contributions
skills development scorecard. Different scorecards would be used, are set out in Code 400 (for non-QSEs) and Code 800, Statement
depending on whether the measured entity is a non-QSE or a QSE. 804 (for QSEs).
The following skills development scorecard applies to non-QSEs:
Skills development element Weighting points Compliance target
Skills development spend on learning programmes identified
on the learning programme matrix
Skills development spend on learning programmes for black employees 6 3%
as a percentage of leviable amount using the adjusted recognition
Skills development spend on learning programmes for black employees 3 0.3%
with disabilities as a percentage of leviable amount using the
adjusted recognition for gender
Number of black employees participating in in-service training 6 5%
programmes as a percentage of total employees using the
adjusted recognition for gender
The following skills development scorecard applies to QSEs:
Skills development element Weighting points Compliance target
Adjusted skills development spend on learning programmes for 25 2%
black employees as a percentage of leviable amount.
6.2 Key requirements Priority skills are defined as:
skills that (1) are value-adding to the activities of company
It should be stressed that the Codes are very clear. There is no in line with its core business in areas, or (2) it cannot
recognition and therefore no points for any skills development unless outsource, or (3) are within the production/operational
a company: part of the company's value-chain (Core Skills); or
complies with the provisions of the Skills Development Act skills identified as being critical by any SETA (Critical
and Skills Development Levies Act;
skills identified as being scarce by any SETA (Scarce Skills);
is registered with the relevant SETA;
as well as
has developed a Workplace Skills Plan; and
any skills specifically identified:
has employed programmes aimed at developing Priority Skills • in a Sector Skills Plan issued by the SA Department of
generally, and specifically, for black employees. Labour; and
• by the JIPSA established as part of the ASGISA.
23 l Cliffe Dekker Hofmeyr THE WAY TO BEE
6.3 What is SETA? 6.4 What is the learning programme matrix?
SETA is a Sector Education and Training Authority established by The Learning Programme Matrix (the LPM) is attached to Code
section 9(1) of the Skills Development Act having jurisdiction over 400 and is an extremely useful document.
measured entities. As we understand the purpose of the LPM, only learning programmes
listed on that matrix will be recognised as skills development. The
limitation of recognition referred to at 6.10 should be noted.
The Learning Programme Matrix:
Category Narrative description Learning site Learning achievement
Skills development spend on learning programmes identified on the LPM:
A Institution-based theoretical Institutional instruction Institutions such as Recognised theoretical knowledge
instruction alone - formally universities and colleges, resulting in the achievement of a degree,
assessed by the institution schools, ABET providers diploma or certificate issued by an
accredited or registered formal
institution of learning
B Institution-based theoretical Mixed mode delivery with Institutions such as Theoretical knowledge and workplace
instruction as well as some institutional instruction as universities and colleges, experience with set requirements
practical learning with an well as supervised learning schools, ABET providers resulting in the achievement of a degree,
employer or in a simulated in an appropriate and workplace diploma or certificate issued by an
work environment - formally workplace or simulated accredited or registered formal
assessed through the institution work environment institution of learning
C Recognised or registered Structured learning in the Workplace Occupational or professional knowledge
structured experiential learning workplace with mentoring and experience formally recognised
in the workplace that is required or coaching through registration or licensing
after the achievement of a
qualification - formally assessed
by a statutory occupational or
D Occupationally-directed Institutional instruction Institution and workplace Theoretical knowledge and workplace
instructional and work-based together with structured, learning, resulting in the achievement
learning programme that requires supervised experiential of a SA Qualifications Authority
a formal contract - formally learning in the workplace registered qualification, a certificate or
assessed by an accredited body other similar occupational or
professional qualification issued by an
accredited or registered formal
institution of learning
E Occupationally-directed Structured, supervised Workplace and some Credits awarded for registered unit
instructional and work-based experiential learning in the institutional as well as standards
learning programme that does not workplace which may ABET providers
require a formal contract - formally include some institutional
assessed by an accredited body instruction
F Occupationally-directed informal Structured information Institutions, conferences Continuing professional development,
instructional programmes sharing or direct instruction and meetings attendance certificates and credits
involving workshops, against registered unit standards (in
seminars and conferences some instances)
and short courses
G Work-based informal programmes Informal training Workplace Increased understand of job or work
context or improved performance or skills
Cliffe Dekker Hofmeyr THE WAY TO BEE l 24
6.5 What is ABET? can be provided. In the event that an independent written certificate
cannot be provided, the programme may still qualify as a certified
ABET refers to Adult Basic Education and Training as determined programme if an enrolment certificate can be issued by an
by the National Qualifications Authority. Skills development spend independent person, confirming the employees progress. Even
on such programmes will be multiplied by 1.25 thus allowing the though no certification is available, a programme may still qualify
measured entity certain enhanced recognition on the scorecard. In for skills development purposes.
other words, should a measured entity spend R10,000 for sending
a black employee on an ABET programme, its recognisable spend 6.9 What is a "learnership"? A look into in-service
will be R10,000 multiplied by 1.25, being R12,500. training programmes
6.6 How is the term "spend" defined? A "learnership" is a form of internship provided for in the Skills
Development Act. Learnerships are approved by the relevant SETA
A spend is any lawful expense paid for any learning programme and are generally fully certified in accordance with the National
listed in the LPM which can be proved by an invoice or an appropriate Qualifications Framework maintained in terms of SA Qualifications
internal accounting record. Authority Act.
Such lawful expenses include:
Learnerships carry significant tax benefits under the Income Tax
costs of training materials; Act. For more information concerning learnerships, readers are
costs of trainers; advised to contact their SETA.
costs of training facilities including costs of catering;
Certain non-learnership training programmes may be regarded as
scholarships and bursaries (but recognition is qualified as learnerships for the particular purposes of Code 400, but it would
per paragraph 6.10 below);
not qualify for recognition for the purposes of the Skills Development
course fees; Act. These are category B, C or D learning programmes as set out
accommodation and travel; and in the LPM.
administration costs such as organisation of training including,
A key provision that should be noted is that the full salary paid
cost of a skills development facilitator or a training manager.
to an employee participating as a learner in a learnership or a
category B, C or D learning programme constitutes skills
6.7 What about salaries and wages?
Salaries and wages of employees participating as learners in any
6.10 Dealing with bursaries and scholarships
learning programme will only be regarded as skills development
expenses if the learning programme is a learnership or if it falls
Bursaries and scholarships are not regarded as skills development
within category B, C or D of the LPM.
spend if the company is able to recover any portion from the recipient
thereof or if the company sets conditions regarding the furnishing
6.8 Learning programme certification
of the bursary or scholarship, other than conditions of the following
Certified programmes will be recognised if proof in the form of an
invoice can be submitted. Uncertified programmes and category G
that the employee successfully complete the studies within
learning programmes (under the LPM) will be limited to a maximum
the time period provided; or
of 15% recognition of total skills development spend.
that the employee be required to continue employment
A certified programme is where an independent written certificate, with the company for a period not more than the period of
as prescribed by the "Learning Achievements" column of the LPM the studies.
25 l Cliffe Dekker Hofmeyr THE WAY TO BEE
6.11 Did you forget the adjusted recognition for gender? 6.12 What are the implications for QSEs/EMEs?
The adjusted recognition for gender, referred to in paragraph 4.5, The QSE skills development scorecard is considerably less onerous
also applies to skills development spend and the calculation of points than the skills development scorecard applicable to non-QSEs.
for learnerships and learning programmes. This emphasises the
value in employing black women at every level of the measured entity.
7 THE PREFERENTIAL PROCUREMENT ELEMENT OF BEE
7.1 What is preferential procurement under the Codes? Points are scored by measuring the extent to which procurement
spend meets the compliance targets set out in the preferential
According to the DTI, preferential procurement is the mechanism procurement scorecard. Preferential procurement counts for a total
used to drive transformation in the economy by encouraging of 20 points under the generic scorecard and 25 points under the
procurement only from suppliers that are compliant with the QSE scorecard.
scorecards contained in the Codes. Accordingly, particular suppliers
are to be preferred based on the extent of their compliance with Points are awarded in three beneficiary categories as follows:
BEE compliant suppliers (Category A Beneficiaries)
The preferential procurement element of BEE is measured under
the preferential procurement scorecard (Code 500). The preferential QSE and EME suppliers (Category B Beneficiaries)
procurement of QSEs is measured under the preferential procurement 3 points; and
scorecard for QSEs (Code 800 Statement 805).
50% black owned and 30% black women owned suppliers
As in the case of the Employment Equity Scorecard, compliance is (Category C Beneficiaries)
measured over a 10-year period broken up into two consecutive 5 points (3 points for 50% black-owned suppliers and
five-year periods. 2 points for black woman-owned suppliers).
The preferential procurement scorecard for non-QSEs is set out below:
Criteria Weighting points Compliance targets
years 0 - 5 years 6 -10
BEE procurement spend from all suppliers based on the BEE procurement 12 50% 70%
recognition levels as a percentage of total measured procurement spend
BEE procurement spend from QSEs or from EMEs based on the applicable 3 10% 15%
BEE procurement recognition levels as a percentage of total measured
BEE procurement spend from any of the following suppliers as a 5 15% 20%
percentage of total measured procurement spend:
suppliers that are more than 50% black owned regardless
of their BEE procurement recognition level; or
suppliers that are more than 30% black women owned
regardless of their BEE procurement recognition level.
Cliffe Dekker Hofmeyr THE WAY TO BEE l 26
The QSE preferential procurement scorecard is as follows:
Criteria Weighting points Compliance targets
years 0 - 5 years 6 -10
BEE Procurement Spend from all Suppliers based on the BEE 25 40% 50%
Procurement Recognition Levels as a percentage of
Total Measured Procurement Spend
7.2 What is Total Measured Procurement Spend and how all goods and services that are imported or procured from a
is it measured? non-SA source subject to exclusions referred to below; and
goods and services procured between intra group companies.
Total Measured Procurement Spend (TMPS) is that part of total
procurement spend which is specifically recognised under the The following categories of expenditure are excluded from the
preferential procurement scorecard. To determine TMPS certain calculation of TMPS:
categories of expenditure are specifically excluded.
taxation and levies imposed by an organ of state, including
The following categories of procurement expenditure are included rates imposed by a municipality or other local government;
within TMPS: all public sector procurement (other than goods or services
all goods and services procured that comprise cost of sales; procured from local government acting as a reseller) from
organs of state and public entities listed in schedule 1 of the
all goods and services procured that comprise operational
PFMA and generally all procurement from organs of state or
public entities that enjoy statutory or regulatory monopoly;
all capital expenditure incurred;
salaries, wages, remuneration and emoluments paid to
all goods and services procured from public entities and organs employees and directors;
of state listed in schedules 2 and 3 to the PFMA;
investments in or loans to an associated enterprise;
all goods and services procured from suppliers that enjoy a
investments, loans or donations qualifying for recognition
under the enterprise development scorecard and the socio-
all procurement for a third party or a client, where the cost of economic development scorecard;
that procurement is an expense recorded in the annual financial
pass through third party procurement (where the cost of that
procurement is an expense not recorded in the financial
any procurement which is outsourced labour expenditure statements); and
(ie labour brokers and independent contractors);
the following imported goods and services:
payments made to any post retirement funding scheme or to
• imported capital goods or components for value-added
a medical aid or similar medical insurer for employees,
production in South Africa, provided there is no existing
excluding any portions of such payments which are a
local production of such capital goods or components, and
contribution to a capital investment of the employee;
importing those capital goods or components promotes
any commissions or similar payments payable to any other further value-added production within South Africa;
person pursuant to the business or trade of the company;
• imported goods and services other than those listed above,
all goods and services procured in carrying out BEE but if there is no local production of those goods or services
excluding contributions taken into account under the enterprise including, but not limited to, imported goods or services that
development scorecard and the socio-economic development carry a brand different to the locally produced goods or
scorecard (although expenditure incurred in facilitating such services, or have different technical specifications to the
contributions are allowed); locally produced goods or services.
27 l Cliffe Dekker Hofmeyr THE WAY TO BEE
A list of the public entities listed in the various schedules to the Entities listed under schedule 3 - Other Public Entities
PFMA, is set out below. (expenditure included in TMPS). This schedule is divided into
various parts and is extremely lengthy. What follows are a few
Entities listed under schedule 1 (expenditure excluded from TMPS) indicative extracts:
Commission for Gender Equality All the SETAs
Commission for the Promotion and Protection of the Rights Accounting Standards Board
of Cultural, Religious and Linguistic Communities
Commission for Conciliation, Mediation and Arbitration
Human Rights Commission Competition Commission
Financial and Fiscal Commission Competition Tribunal
Independent Broadcasting Authority Education and Labour Relations Council
Independent Communications Authority of South Africa Estate Agency Affairs Board
Independent Electoral Commission Film and Publication Board
Municipal Demarcation Board Financial Services Board
Pan South African Language Board Human Sciences Research Council
National Consumer Tribunal
National Credit Regulator
Entities listed under schedule 2 - Major Public Entities National Development Agency
(expenditure included in TMPS)
National Economic, Development and Labour Council
Air Traffic and Navigation Services Company National Energy Regulator of South Africa
Airports Company of South Afica (ACSA) National Lotteries Board
Alexkor Ltd National Nuclear Regulator
Armaments Corporation of South Africa SA Heritage Resources Agency
CEF (Pty) Ltd SA Heritage Resources Agency, Cape Town
Denel SA Local Government Association
Development Bank of Southern Africa SA Maritime Safety Authority
Eskom SA Medical Research Council
IDC Ltd SA National Accreditation System
Independent Development Trust SA National Roads Agency
Land and Agricultural Bank of South Africa SA Nuclear Energy Corporation
SA Broadcasting Corporation SA Qualifications Authority
SA Forestry Company Ltd SA Revenue Service
SA Nuclear Energy Corporation SA National Parks
SA Post Office Ltd Unemployment Insurance Fund
Telkom SA Ltd Universal Service Agency
Trans-Caledon Tunnel Authority Any subsidiary or entity under the ownership control of the
above public entities
Cliffe Dekker Hofmeyr THE WAY TO BEE l 28
7.3 What are the BEE procurement recognition levels Finally, enhanced recognition is given to procurement spend on
referred to in the preferential procurement scorecards? professional service providers (eg lawyers, engineers, accountants,
etc.) and enterprises who are more than 50% black-owned by
The BEE procurement recognition level refers to the percentage of recognising 125% of the procurement spend.
procurement spend that may be recognised as being BEE compliant
for the purposes of measuring preferential procurement. These are 7.5 How is the score for preferential procurement
based on the compliance levels in the scoring matrix contained at calculated?
paragraph 2.5 (scoring matrix).
Calculations are done in terms of formulae provided in Annexe 500
For example, if legal services are procured from a legal service (A) and 500 (B) to Code 500. In broad summary, they work as
provider with a Level 3 BEE contributor status then 110% of the follows:
amount spent can be taken into account when determining BEE
procurement spend. TMPS is established by including and excluding, respectively,
those expense items referred to in paragraph 7.2;
All EMEs have a deemed recognition level of 100%. In other words,
Level 4 contributors to BEE and if they are in excess of 50% black the amount spent on each individual supplier is multiplied
owned, qualify for a deemed recognition level of 110% (Level 3 by (i) that supplier's BEE recognition level and, (ii) where
contributors to BEE). relevant, that suppliers enhanced recognition multiple
(referred to in paragraph 7.4 above) to determine the Rand
The procurement spend on suppliers who are non-compliant value of BEE procurement spend; and
contributors (viz those who score less than 30% on the scoring
matrix) cannot be taken into account in determining the procurement each supplier is then allocated to its beneficiary category as
score under Category A Beneficiaries but may be recognised under referred to in paragraph 7.1.6 and each supplier's BEE
Category B or Category C Beneficiaries. procurement spend is added together for each beneficiary
category. A supplier may fall into more than one beneficiary
7.4 Are there any preferential procurement bonus points? category.
There are no bonus points per se but there are other forms of The total BEE spend for each category is then tallied to derive the
enhanced recognition. Total BEE Procurement Spend (TBPS) for each beneficiary category.
Each beneficiary category TBPS is calculated as a percentage
The first is in respect of so-called "value-adding suppliers" that of TMPS and the resultant percentage is then:
qualify for enhanced recognition of 125% of the actual value of
procurement. A value-adding supplier is rather mysteriously defined (i) divided by the compliance target percentage for the five-year
as an entity which is registered for VAT and whose net profit before period in question and then
tax summed with its total labour cost exceeds 25% of the value of
its total revenue. In the Interpretive Guide value-adding suppliers (ii) multiplied by the weighting points applicable to that beneficiary
category to determine a score for each beneficiary category.
are described as suppliers that benefit or add value to raw materials
and tend to manufacture and produce locally rather than relying too The scores for all three beneficiary categories are then tallied to
heavily on imports. determine the total score out of 20.
Secondly, if a measured enterprise procures goods and services from
a supplier that is also a recipient of enterprise development
contributions from that measured entity, then 120% of that
procurement spend can be recognised. This is an effort to incentive
sustainable enterprise development contributions.
29 l Cliffe Dekker Hofmeyr THE WAY TO BEE
The following model demonstrates the application of the preferential procurement scorecard
Example of the application of the preferential procurement calculation:
SA personal services firm is not a QSE or an EME and procures R1 million TMPS of goods and services from 10 suppliers every
year. Of those suppliers:
Supplier 1 scores 53 points on the generic scorecard and also a value adding enterprise and supplies goods with a value of R250,000
Supplier 2 scores 63 points on the generic scorecard, is a QSE which is also 50% black owned and supplies goods with a value of
Supplier 3 scores 32 points on the generic scorecard and supplies goods with a value of R300,000 - supplier 3 is a black-owned
professional service provider
Supplier 4 scores 28 points on the generic scorecards and is more than 30% owned by black women and supplies goods to the
value of R60,000
Supplier 5 is an EME supplying goods to the value of R20,000
All of the remaining suppliers score less than 30 points on the generic scorecard, and do not qualify as Category B or Category C
Beneficiaries or 30% black women owned enterprises (and so are regarded as non compliant BEE contributors and the procurement
spend on these suppliers is not taken into account in determining TBPS).
SA personal services firm is thus able to recognise:
Supplier 1 60% x R250,000 x 1.25 = R187,500 (supplier 1 is a level 6 contributor to BEE)
Supplier 2 100% x R30,000 = R30,000 (supplier 2 is a level 5 contributor to BEE but is entitled to claim level 4 status as it
is 50% black owned)
Supplier 3 10% x R300,000 x 1.25 = R37,500 (supplier 3 is a level 8 contributor to BEE and because its is a black owned
professional service provider it qualifies for enhanced recognition)
Supplier 4: the full R60,000 is recognised as it more than 30% black women owned even though it is regarded as a non-compliant
BEE contributor under the scoring matrix
Supplier 5 the full R20,000 is recognised as an EME is deemed to be a level 4 contributor
Cliffe Dekker Hofmeyr THE WAY TO BEE l 30
SA personal services firm can claim TBPS as follows:
The Category A Beneficiary TBPS is the sum of R255,000 (R187,500 + 30,000 + 37,500) providing a score of 6.12 out of a maximum
of 12 points calculated as follows:
R1,000,000 x 12
The Category B Beneficiary TBPS is the sum of R50,000 (R30,000 + R20,000) providing a score of 1.5 out of a maximum of 3 points
calculated as follows:
The Category C Beneficiary TBPS is R127,500 (R30,000 + R37,500 + R60,000) divided into R67,500 TBPS from 50% black owned
suppliers and R60,000 TBPS from black woman owned suppliers providing a score of 2.025 for black owned suppliers and 2 points
for black women owned suppliers, calculated as follows:
Black owned suppliers Black women owned suppliers
R67,500 R60 000
x 100 x 100
R1,000,000 x3 R1,000,000 x2
= 2.025 =2
SA Personal Service firm can claim 11.645 points out of a maximum of 20 points under the preferential procurement
7.6 What are the implications for QSEs/EMEs? 7.7 What about procurement by the public sector?
The QSE preferential procurement scorecard is considerably less Public sector procurement is governed by the Preferential
onerous than that which is applicable to non-QSEs. The fact that Procurement Policy Framework Act, 2000 (the PPPFA). Draft
non-QSEs are required to procure 10% of total measured procurement regulations have been issued which seek to align the PPPFA.
by value from QSEs or EMEs is a significant gain for the smaller
business environment. These amended regulations have yet to be finalised.
31 l Cliffe Dekker Hofmeyr THE WAY TO BEE
8 The enterprise development element of BEE
8.1 What is enterprise development? 8.2 How are enterprise development contributions
measured under the Codes?
Enterprise development, as the name implies, relates to contributions
(monetary or non-monetary) actually initiated and implemented in Enterprise development constitutes 15 points under the generic
favour of assisting or accelerating the development, sustainability scorecard and 25 points under the QSE scorecard. Enterprise
and ultimate financial and operational independence of beneficiary development contributions to BEE are calculated under the enterprise
enterprises. While it is primarily aimed at black owned QSEs and development scorecard (Code 600). QSE enterprise development
EMEs, other larger entities can also benefit provided they are at contributions are measured under the QSE scorecard (Code 800,
least in part black owned. Statement 806).
The Enterprise Development Scorecard is as follows (non-QSE):
Criteria Weighting points
Average annual value of all qualifying contributions made by the measured entity measured 15
from the commencement of this statement or the inception date to the date of
measurement as a percentage of the target
The Enterprise Development Scorecard for QSE is as follows:
Criteria Weighting points
Average annual value of all qualifying contributions made by the measured entity 25
measured from the commencement of this statement or the inception date to
the date of measurement as a percentage of the target
8.3 The targets The QSE target is 2% of NPAT.
The target under the enterprise development scorecard is 3% of net These targets are to be met every year for the duration of the Codes.
profit after tax (NPAT). However, in the case of entities: In instances where a measured entity has sustained records of above
that have not achieved a profit in the last year or, on average over "industry norm" average NPAT, applying the formula to measure
five years, or whose net profit margin is less than a quarter of the that entity's points would appear to be a relatively simple matter.
industry norm, the target is 3% times indicative profit margin (being It appears that the intention is to ensure that companies do not benefit
the profit margin (NPAT/Turnover) in the last year where the from under-reporting on their profitability making the achievement
company's profit margin is at least one quarter of the industry norm) of the target relatively easy. Unfortunately, the mechanism provided
x Turnover). by the Codes to address this mischief is needlessly opaque. In all
instances where measured enterprises have generated no profit, or
There is no indication of how the industry norm is to be determined no profit on average over five years, or "marginal profits", the
nor any indication of when the turnover target is actually meant to application of the formula provided will prove to be a significant
be applied. challenge.
We have used "or" between the above points, but it is unclear from
the enterprise development scorecard whether turnover applies when 8.4 What is the significance of the "commencement/
both conditions are present or either of them are present. It seems inception date"?
to be implied that a notional profit derived from turnover
Special provision is made to recognise as enterprise development
must be applied in either one or both of the instances referred
contributions any historical initiatives undertaken by measured
entities. There are a number of SA businesses and multinationals
Cliffe Dekker Hofmeyr THE WAY TO BEE l 32
operating in South Africa that have undertaken enterprise development preferential terms granted by a measured entity in respect of
since the early 1980's. As such, the intent by the DTI to allow its supply of goods or services to beneficiary entities:
businesses to recognise historical enterprise development contribution
contributions made to settling service costs relating to the
is laudable. The DTI has limited this recognition by providing that
operational or financial capacity or efficiency levels of
where the inception date is chosen by the measured entity, this
earlier date may not be more than five years prior to the
commencement date of the Codes. payments made by the measured entity to third parties to
perform enterprise development on the measured
Enterprise development contributions are recognised on a cumulative entity's behalf;
basis and may be measured either from the date of commencement of
the Codes (commencement date) or the abovementioned inception date. discounts given to beneficiary entities in relation to the
acquisition and maintenance costs associated with the grant
to those beneficiary entities of franchise, licence, agency,
8.5 Which businesses can a measured business make
distribution or other similar business rights;
enterprise development contributions to?
the creation or development of capacity and expertise for
The following businesses can be beneficiaries (Qualifying beneficiary entities needed to manufacture or produce goods
Beneficiaries) of enterprise development contributions: or services previously not manufactured, produced or provided
in South Africa;
Category A: involves EMEs or QSEs that are 50% black
facilitating access to credit for beneficiary entities without
owned or 50% black women owned.
access to similar credit facilities through traditional means
Category B involves (any size) enterprises that are: owing to a lack of credit history, high-risk or lack of collateral;
• 50% black owned or 50% black women owned; or
• 25% black owned or 25% black women owned with a provision of training or mentoring to beneficiary entities
BEE status of between level 1 and 6. which will assist the beneficiary entities to increase their
operational or financial capacity;
8.6 What constitutes a contribution to enterprise the maintenance by the measured entity of an enterprise
development? development unit which focuses exclusively on support of
beneficiary entities or candidate beneficiary entities;
The following examples of enterprise development are provided in
the creation or development of the capacity of beneficiary
the enterprise development scorecard:
entities which will enable them to manufacture and produce
grant contributions to beneficiary entities; goods or provide services previously not available in South
investments in beneficiary entities; Africa, may constitute an enterprise development contribution;
loans made to beneficiary entities;
new projects promoting beneficiation may constitute an
guarantees given or security provided on behalf of beneficiaries: enterprise development contribution.
credit facilities made available to beneficiary entities;
direct costs incurred by a measured entity in assisting and 8.7 What is the Benefit Factor Matrix?
hastening development of beneficiary entities;
The benefit factor matrix is provided as a means by which to
overhead costs of a measured entity directly attributable to
determine what types of contributions are recognised and the manner
enterprise development contributions;
of calculating the value of the contribution.
enterprise development or developmental capital advanced
to beneficiary entities; This involves multiplying the benefit factor (right hand column)
with the contribution amount (middle column).
preferential credit terms granted by a measured entity to
33 l Cliffe Dekker Hofmeyr THE WAY TO BEE
The Benefit Factor Matrix
Contribution type Contribution amount Benefit factor
Grant and related contributions
Grant contribution Full grant amount 100%
Direct cost incurred in supporting enterprise development Verifiable cost (including both 100%
monetary and non-monetary)
Discounts in addition to normal business practices supporting Discount amount (in addition to 100%
enterprise development normal business discount)
Overhead costs incurred in supporting enterprise development Verifiable costs (including both 80%
(including people appointed in enterprise development) monetary and non-monetary)
Loans and related contributions
Interest-free loan with no security requirements supporting Outstanding loan amount 100%
Standard loan to black owned EME and QSEs Outstanding loan amount 70%
Standard loan provided to other beneficiary enterprises Outstanding loan amount 60%
Guarantees provided on behalf of a beneficiary entity Guarantee amount 3%
Lower interest rate Outstanding loan amount Prime rate - actual rate
Equity investments and related contributions
Minority investment in black owned EME and QSEs Investment amount 100%
Minority investment in other beneficiary enterprises Investment amount 80%
Enterprise development investment with lower dividend Investment amount Dividend rate of ordinary
to financier shareholders - actual
dividend rate of contributor
Contributions made in the form of human resource
Professional services rendered at no cost and supporting Commercial hourly rate of professional 80%
Professional services rendered at a discount and supporting Value of discount based on commercial 80%
enterprise development hourly rate of professional
Time of employees of measured entity productively deployed Monthly salary divided by 160 80%
in assisting beneficiaries
Shorter payment periods Percentage of invoiced amount Percentage being 15 days less
the number of days from
invoice to payment
Cliffe Dekker Hofmeyr THE WAY TO BEE l 34
8.8 Are there any bonus points for enterprise development? 8.9 What are the implications for QSEs/EMEs?
There are no bonus points for enterprise development, but The QSE enterprise development scorecard is considerably less
contributions to Category A Beneficiaries (see paragraph 8.4) onerous than the enterprise development scorecard applicable to
qualify for 125% recognition against actual value. non-QSEs.
The fact that black owned QSEs and EMEs can be Qualifying
Beneficiaries regardless of their own BEE credentials represents an
important benefit for this segment of the economy.
9 THE SOCIO-ECONOMIC DEVELOPMENT ELEMENT OF BEE
9.1 How is the socio-economic development element 5 points under the generic scorecard and 25 points under the QSE
measured under the Codes? scorecard.
The socio-economic development element of BEE is measured The socio-economic development element under the Codes primarily
using a socio-economic development scorecard. This scorecard relates to corporate social investment and is regulated in terms of
differs depending on whether the business being measured is QSE Code 700 (for non-QSEs) and Code 800, Statement 807 (for QSEs).
or not. Socio-economic development contributions will contribute
The following socio-economic development contribution scorecard applies to non-QSEs:
Criteria Weighting points
Average annual value of all qualifying contributions made by the measured entity measured 5
from the commencement of this statement or the inception date to the date of
measurement as a percentage of the target
The following socio-economic development contribution scorecard applies to QSEs:
Criteria Weighting points
Average annual value of all qualifying contributions made by the measured entity measured 25
from the commencement of this statement or the inception date to the date of measurement
as a percentage of the target
9.2 What is the significance of the "commencement/ The decision by the DTI to allow recognition of historic corporate
inception date"? social investment contributions is laudable. As with the enterprise
development code, the intent has been undermined by the provision
referring to the "inception date". This provision asserts that, where
The Code specially provides for the recognition of any historical
the inception date of the social responsibility undertaken by the
initiatives, undertaken by measured businesses, as socio-economic measured entity is selected by such entity, that earlier date may not
development contributions. There are a number of SA businesses be more than five years prior to the commencement date of the
and multinationals operating in South Africa which have historically Codes. The provision therefore has the effect of limiting the
undertaken corporate social responsibility. recognition of historic corporate social responsibility.
35 l Cliffe Dekker Hofmeyr THE WAY TO BEE
Corporate social investment contributions are recognised on a community training, skills development for unemployed
cumulative basis. Therefore, they may be measured either from the people, adult basic education and training; or
date of commencement of the Codes (commencement date), or
from the abovementioned earlier inception date. support of arts, cultural or sporting development programmes.
9.3 What are the objectives of socio-economic 9.4 Who qualifies as a contribution beneficiary?
Code 700 recognises the following as beneficiaries:
"Socio-economic development" is defined to include programmes
the full value of socio-economic development contributions
and contributions, approved socio-economic development
made to beneficiaries will be recognised if at least 75% of the
programmes and sector specific programmes.
value directly benefits black people; or
"Approved socio-economic development programmes" refers to if less than 75% of the full value of socio-economic
monetary or non-monetary contributions carried out for the benefit development contributions directly benefits black people,
of any project approved for socio-economic development by any the percentage of the full value that does benefit black people
organ of state or sector. They include: will be recognised.
projects focusing on environmental conservation,
9.5 What types of contributions can be made?
awareness, education and waste management;
projects targeting infrastructural development, enterprise Code 700 recognises the following types of contributions:
creation or reconstruction in underdeveloped areas;
grant contributions to beneficiaries of socio-economic
projects targeting rural communities or geographic areas development contributions;
identified in the government's integrated sustainable rural
guarantees given, or security provided, for beneficiaries;
development or urban renewal programmes;
direct costs incurred by a measured entity in assisting
the provision of development capital for communities;
training or mentoring to beneficiary communities which will
overhead costs of a measured entity directly attributable to
assist them to increase financial capacity; and
socio-economic development contributions;
offering preferential terms to beneficiary communities when
developmental capital advanced to beneficiary communities;
purchasing their goods/services.
preferential terms granted by a measured entity for its supply
The purpose of this element of the scorecard is to encourage of goods or services to beneficiary communities;
initiatives that enhance the ability of black people who are not part
of the economic mainstream to participate in the economy. payments made by the measured entity to third parties to
perform socio-economic development on the measured
Socio-economic development programmes commonly take the entity's behalf;
following forms: provision of training or mentoring to beneficiary communities
which will assist them to increase their financial capacity; and
development programmes for women, youth, people with
disabilities, people living in rural areas; the maintenance by the measured entity of a socio-economic
development unit which focuses only on support of beneficiaries
support of healthcare and HIV/AIDS programmes;
and beneficiary communities.
support for education programmes, resources and materials
at primary, secondary and tertiary education level, as well as
bursaries and scholarships;
Cliffe Dekker Hofmeyr THE WAY TO BEE l 36
10.1 What is the purpose of BEE verification? 10.2 Who is responsible for BEE verification?
The rationale for BEE verification lies in compliance monitoring, In order to have its BEE status verified, a measured enterprise would
and relates to the process (undertaken by an accredited verification need to employ the services of an accredited verification agency to
agency) of determining the overall extent to which a measured evaluate and measure its BEE compliance.
entity complies with the BEE targets set out in the Codes. This
process gives confidence to all parties that rely upon the BEE score Verification agencies are required, in conducting the BEE verification
of a measured entity (as set out in a verification certificate) that the process, to apply the guidelines contemplated in the BEE verification
information on which the certificate is based has been verified and manual gazetted on 18 July 2008.
its accuracy tested. Verification is therefore intended to reduce the
risk of misstatement of individual scorecard elements to an acceptably In order to conduct their verification activities legitimately, verification
low level and to provide an assurance of the integrity of the agencies are required to be accredited by the South African National
information on which the verification is based. Accreditation System (SANAS) against criteria specified in SANAS
R47. The relevant provisions of SANAS R47 were incorporated
In an effort to measure how enterprises fare in relation to one into the verification manual. To date, a small number of verification
another, the Codes have introduced a rating system whereby agencies have been accredited by SANAS.
measured entities are accorded an overall BEE compliance level.
Please refer to Paragraph 2.5. 10.3 What is the status of verification certificated issued
by non-accredited agencies?
A level 1 contributor is therefore the highest overall BEE status
level that a measured enterprise can achieve, and any enterprise The DTI issued regulations effective from 1 August 2009 to the
scoring less than 30 points on the scorecard is regarded as a non- effect that:
compliant contributor. It should be noted that even though the
generic scorecard should, in theory, be calculated out of a total of from 1 February 2010, only BEE verification certificates
100 BEE contribution points, due to bonus points applying in respect issued by accredited verification agencies accredited by SANAS
of certain BEE elements such as ownership, it is notionally possible or verification agencies that are in possession of a valid
for a measured enterprise to score more than 100 points using the pre-assessment letter from SANAS will be valid and the period
scorecard system. of validity of these certificates will be 12 months from the date
of issue; and
Increasingly, it has become common place for regulators and
government agencies that are required to apply the Codes in the all verification certificates issued by non-accredited verification
award of tenders, licenses, or any other government-related agencies before 1 February 2010, will remain valid for
transactions where BEE forms part of the evaluation criteria, to 12 months from the date of issue.
require bidders to meet a threshold BEE status for purposes of These regulations effectively render self assessment legally ineffective
qualifying for consideration of such award. Tenders are therefore from a BEE compliance perspective.
increasingly requiring bidders to meet, for example a level 3 BEE
contributor status, so as to be considered for such award. 10.4 How will verifications be done?
Each BEE status band (levels 1 to 8) is assigned a corresponding
Verifications must be done in accordance with a verification plan
BEE procurement recognition level, being the portion of spend
to be drawn up by the verification agency and must take place at
which an enterprise can claim for interacting with the measured
the business premises of the measured enterprise.
enterprise. For example, if a measured entity procures from a level
3 contributor, it can claim R1.10 in every R1 spent on that entity, The verification team is required to gather documentary evidence
as BEE procurement spend. and will interview a sample of sufficient staff of the measured entity
37 l Cliffe Dekker Hofmeyr THE WAY TO BEE
to ensure that the information gathered is sound. The verification verifying the overall BEE status of that measured entity as well as
team will then analyse all the information and evidence to determine the scoring for each BEE scorecard element. In terms of the
the BEE status of the measured entity. verification manual, verification agencies are required to keep a
record of all verification certificates they issue.
The reference sources applied by a verification agency to evaluate
a measured entity's BEE compliance are: The verification agency is also required to issue a verification report
providing a detailed explanation of how it arrived at the scores
achieved in respect of each BEE element, and consequently the
generic and QSE scorecards; overall BEE status of the measured enterprise.
sector codes gazetted in terms of section 9 of the BEE Act;
A verification certificate will be valid for a period of one year after
(if relevant) criteria for EMEs under the Codes; its date of issue.
any other guidelines issued by the DTI; and
10.5 When should verification certificates be used?
any other legislation as provided for in the Codes such as the
EEA and the Skills Development Act. Verification certificates may be made publicly available by a
measured entity when engaging, for example, with third parties
Once the verification process is complete, the verification agency seeking information of the measured entity's BEE status or in tenders
must issue the measured enterprise with a verification certificate submitted by a measured entity.
Since the publication of the final Codes more than two years ago, Act and Codes, and should therefore provide public bodies and
there has been much progress in the arena of BEE measurement state-controlled enterprises with clear guidance on how to deal with
and compliance, as well as additional complexities and uncertainties the provisions of the BEE Act and the Codes in their procurement
which are often associated with areas that are dynamic and policies.
The recent changes in government have also led to many public
The Codes have afforded us greater certainty with regard to the utterances and debate about whether or not BEE in its current form
measurement and regulation of BEE. is achieving its aims, and we may see further changes to BEE policy
in the future.
The verification industry has begun to see proper regulation with
the commencement of accreditations by SANAS and the introduction Whatever changes are made, it is clear that BEE will remain an
of verification guidelines. imperative for some time to come.
The long awaited amendments to the PPPFA are currently in draft
form. These amendments seek to align the PPPFA with the BEE
Cliffe Dekker Hofmeyr THE WAY TO BEE l 38
11 GLOSSARY - The Way to BEE 2009
ABET Adult Basic Education and Training
ASGISA Accelerated and Shared Growth Initiative
BEE Act B-BBEE Act (Broad-based Black Economic Empowerment Act of 2003)
BEE Black Economic Empowerment
Commencement Date Date of commencement of the Codes
DTI Department of Trade and Industry
DME Codes Codes of Good Practice for the Mineral Industry
Codes Codes of Good Practice
Constitution Constitution of the Republic of South Africa Act of 1993
EAP Economically Active Population
EEA Employment Equity Act
ESOPs Employee Share Ownership Schemes
EMEs Exempted Micro Enterprises
JIPSA Joint Initiative for Priority Skills Acquisition
LPM Learning Programme Matrix
NPAT Net Profit After Tax
PFMA Public Finance Management Act, 1999
PPPFA Preferential Procurement Policy Framework Act, 2000
QSEs Qualifying Small Enterprises
RSA Republic of South Africa
SA South African
SANAS South African National Accreditation System
SETA Sector Education and Training Authority
TMPS Total Measured Procurement Spend
TBPS Total BEE Procurement Spend
39 l Cliffe Dekker Hofmeyr THE WAY TO BEE
For advice on BEE-related matters, please contact any member of our BEE team.
Veruscha Pillay Claire Barclay Aadil Patel
Director Director Director
Corporate and Commercial Finance, Projects and Banking Employment
T +27 (0)11 290 7143 T +27 (0)11 286 1370 T +27 (0)11 290 7212
E email@example.com E firstname.lastname@example.org E email@example.com
Allan Hannie Brent Williams
Corporate and Commercial Corporate and Commercial
T +27 (0)21 405 6010 T +27 (0)11 290 6507
E firstname.lastname@example.org E email@example.com
Finance, Projects and Banking
T +27 (0)11 286 1183
JOHANNESBURG CAPE TOWN
6 Sandown Valley Crescent 11 Buitengracht Street
Sandown Cape Town 8001
Sandton 2196 PO Box 695
Private Bag X40 Cape Town 8000
Benmore 2010 South Africa
South Africa Dx 5 Cape Town
Dx 154 Randburg T +27 (0)21 481 6300
T +27 (0)11 286 1100 F +27 (0)21 481 6388
F +27 (0)11 286 1264 E firstname.lastname@example.org
The Way to BEE is published for general
information and is not intended as legal advice.
1 Protea Place 5th floor Protea Place
As every situation depends on its own facts Sandown Protea Road
and circumstances, professional advice should Sandton 2196 Claremont 7708
be sought. Private Bag X7 PO Box 23110
Benmore 2010 Claremont 7735
South Africa South Africa
Dx 42 Johannesburg Dx 5 Cape Town
2009. For permission to reproduce a
T +27 (0)11 290 7000 T +27 (0)21 683 2621
publication, please contact our marketing F +27 (0)11 290 7300 F +27 (0)21 671 9740
team on email@example.com E firstname.lastname@example.org E email@example.com
Cliffe Dekker Hofmeyr is a member of DLA Piper Group,
EVERYTHING MATTERS an alliance of legal practices